Regulation S provides a safe harbor for domestic and foreign issuer offshore distributions of securities. U.S. issuers that satisfy the Regulation S requirements for a given offering need not worry about registering the issue as it is deemed to be outside the U.S. and not subject to Section 5. The requirements for exemption under Regulation S are presented in Rule 903(a) and (b). The goal of these requirements is to prevent securities issued offshore from “flowing back” (sold back) to the U.S. market. Rule 903(a) lists two basic requirements that must be met by all issuers, and Rule 903(b) imposes additional requirements depending on the likelihood of the securities to flow back. Rule 903(a) requires that the offering be an “offshore transaction” and that no “directed selling efforts” occur in the US. In order for an offer to be an “offshore transaction,” no offers may be made to persons in the US.
Furthermore, the buyer must be offshore at the time of the purchase, OR the sale must be made on the floor of an established foreign securities exchange, OR for purposes of the resale safe harbor, the sale must be made through the facilities of a designated offshore securities market, and the transaction must not pre-arranged with a buyer in the US. The requirement that no offers be made to persons in the US is similar to the 3a(11) requirement that no offers be made to non-residents of the state and, therefore, poses the exact same problem with respect to Internet offerings. If no accommodation is made for the Internet medium, an Internet offering will necessarily preclude the Regulation S safe harbor due to exposure of the offer to US residents, thereby making them offerees.
Every privately-held company that is seeking to raise capital from foreign investors should properly comply with local laws regarding soliciting capital from investors in a particular country/jurisdiction prior to having a securities offering in place.